Federal Leasing After the Paris Withdrawal

For those of you who have recently awakened from a coma, here is a news alert: President Trump has withdrawn the U.S. from the Paris climate change agreement. Predictably, there has been a tsunami of commentary on the environmental, economic and diplomatic implications of this but precious little mention of the implications for federal real estate. The fact is that the Paris withdrawal has little direct impact on federal leasing but that is because previously enacted, more ambitious, directives remain in place. Paris’ significance is primarily as a bellwether of the direction this Administration is headed. For investors in our tiny niche, here is what you need to know about this event and energy efficiency policy generally.

[Content Note: The focus of this article is GSA leased space. For those of you who are interested in the fate of Energy Savings Performance Contracts (ESPC’s), solar and geothermal retrofits, renewable power purchase agreements and the like will need to read on elsewhere as those are generally associated with the government’s owned real property inventory.]

A Contemporary History of Energy Efficiency Mandates

There are any number of overlapping mandates, borne of legislation, executive orders and international agreements, that have formed sustainability policy for federal real property. Some of these policies have been implemented and others are still in formulation. As I am merciful and short of time, I’ll spare you (and me) the technical dissection with this effort at a synopsis:

Our recent history begins with the Energy Independence and Security Act (EISA), enacted in late 2007 during President Bush’s second presidential term. The legislation was originally proposed by Democrats as the “Clean Energy Act” and Republican support followed with the renaming of the bill to the “Energy Independence and Security Act.” The two titles applied to this legislation are significant to understanding its bipartisan appeal.

From the perspective of federal property investors the most important feature of EISA was its directive that “no Federal agency shall enter into a contract to lease space in a building that has not earned the Energy Star label in the most recent year.” This marked the birth of the Energy Star requirements that exist today in GSA’s standard lease.

President Obama pushed sustainability policy much further. At the outset of his presidency, Obama allocated most of GSA’s American Reinvestment and Recovery Act stimulus funds to convert Federal buildings into high-performance green buildings. Though those projects took years to complete, they were one-time events. More lasting Obama efforts came in the form of executive orders and memorandums that established increasingly ambitious government-wide sustainability goals.

The most pertinent of these is Executive Order 13693 “Planning for Federal Sustainability in the Next Decade,”issued in March 2015. This executive order established the overarching goal for agencies to reduce their direct greenhouse gas (GHG) emissions by at least 40% over the subsequent decade. Three noteworthy targets provided in this order are: (1) to reduce building energy intensity by 2.5% annually through the end of FY 2025, relative to an FY 2015 baseline, (2) to source at least 30% of a building’s electricity from renewable sources and at least 25% of total electricity and thermal energy from clean energy (i.e. renewable or alternative energy) sources, and (3) to require that, beginning in FY 2020, all newly constructed federal buildings greater than 5,000 gross square feet must be designed to achieve net-zero energy consumption and, where feasible, water or waste net-zero by FY 2030.

That’s a lot to ponder, yet it hardly scratches the surface. The Executive Order also requires that energy performance criteria be evaluated as part of the procurement process for all leases above 10,000 RSF and that by 2025 (with increasing goals thereafter) at least 15% of federal buildings larger than 5,000 gross square feet comply with the revised Guiding Principles for Federal Leadership in High Performance and Sustainable Buildings (Guiding Principles). The Guiding Principles set forth a comprehensive checklist of sustainability objectives including energy efficiency, reduced water use, improved stormwater management, climate resilience and so on. It’s important to note that the Guiding Principles do not apply to leases, thus far. Yet, if history is any guide, policies applied to federally owned buildings eventually reach the leased inventory.

And, if this were not enough, the month after President Obama issued E.O. 13693, he signed into law the Energy Efficiency Improvement Act (aka Better Buildings Act). This law directed GSA to develop model commercial leasing provisions that would “align the interests of building owners and tenants with regard to investments in cost-effective energy efficiency measures and cost effective water efficiency measures to encourage building owners and tenants to collaborate in such measures,” though publication of these provisions appears to be on hold until the Trump Administration can fully review them. Further, Title III of this Act extends Energy Star participation by requiring all federal lessors to submit energy usage data into EPA’s Portfolio Manager database, even where their buildings do not meet the threshold for Energy Star certification.

What the Paris Withdrawal Portends for Federal Lessors

In the Paris Agreement the United States pledged to reduce its GHG emissions 26-28% from 2005 levels by 2025. Yet, by the time Obama formally entered into the Paris agreement last Fall, all of the executive and legislative actions summarized above had already been implemented. E.O. 13693 had already established the higher goal of 40% GHG emissions reduction. Therefore, withdrawal from the Paris accord changes nothing for federal buildings.

Except…

The withdrawal is a clear signal that the President intends to throttle back or reverse federal sustainability regulations that he deems an impediment to economic growth. Trump issued an executive order earlier this year doing just that, dismantling roughly two dozen Obama-era executive orders, presidential memorandums, proposed rules and reports focused on climate change issues.

Though his momentum so far has been carried from proclamations drawn up during his campaign and transition, there are going to be more and they will eventually reach the public buildings sector. The President’s greatest impediment, thus far, is one of logistics–he simply doesn’t have the leadership in place to effect more changes.

The primary White House apparatus for addressing environmental issues is the Council on Environmental Quality (CEQ), which is a division of the Executive Office. Currently, there is no chair appointed to lead the CEQ. Also, the White House has not yet appointed an Administrator of the General Services Administration, nor a Public Buildings Commissioner. Once all of these roles are filled, expect action on sustainability policies relating to public buildings, including leased ones.

Specific Policy Impacts

When the action begins, here is how it will likely effect the policies established through the laws and executive orders previously described:

ENERGY INDEPENDENCE AND SECURITY ACT (EISA)

EISA’s Energy Star requirement is already in danger as the President’s FY 2018 budget requests a 31% reduction to EPA’s allocation, including the defunding of Energy Star and proposed transfer of the program to private industry. The White House views the government’s administration of the program as adding unnecessary bloat to the federal bureaucracy. Yet, push-back from industry (including real estate) has been intense and it will be difficult to convince Congress to enable the transfer.

In any case, expect Energy Star to remain a requirement of federal leases (the President can’t re-write the law and Congress is unlikely to amend it) but recognize that evolution of the program–and any federal leasing requirements related to it–will be frozen.

EXECUTIVE ORDER 13693 “PLANNING FOR FEDERAL SUSTAINABILITY IN THE NEXT DECADE,”

This executive order has not yet been targeted by Trump, and the aggressive energy efficiency and “net-zero” goals outlined in this executive order have not yet been translated into specific GSA leasing policy. Though this order focuses primarily on federal buildings and fleet vehicles, it nonetheless sets a goal for the reduction of GHG emissions that substantially exceeds the goal the U.S. agreed to in the Paris accord. It follows logically that Trump will eventually reduce or eliminate the goals set forth in this order.

The wildcard here is that we are talking specifically about real estate, a topic at the core of Trump’s expertise. The real estate industry has been greening itself ardently–even in the absence of federal regulation–where doing so reduces operating costs and improves investment return. Industry sustainability certifications such as LEED and Green Globes have taken root and blossomed. Industry groups appear universally in favor of sustainability measures and some of these industry members have particular influence on Trump. So, certain concepts around energy efficiency may endure but E.O. 13693 will not survive in its current form.

ENERGY EFFICIENCY IMPROVEMENT ACT

The Energy Efficiency Improvement Act sets forth the basic mandate for GSA to develop model leasing provisions that promote cost-effective energy efficiency and water efficiency measures. The language in the law is typically imprecise, providing broad latitude to GSA in crafting these provisions. Work on these lease clauses began towards the end of the Obama Administration and is not yet complete. Judging from some of the public comment documents, a broad spectrum of clauses have been proposed, including some featuring what can best be described as “aspirational”.

This is an area where the specific individuals appointed to lead the CEQ and GSA will hold a lot of sway. Since those individuals are not yet appointed, it’s difficult to predict how the Executive Branch will employ its authorities granted by this law. It’s possible that the right leadership will continue to push for greater energy efficiency in the federal buildings inventory, both leased and owned, but policies tied to GHG goals and metrics will be quashed.

Summing It Up

Nothing I’ve described should be viewed as an absolute reversal of policy. Despite its withdrawal from the Paris Agreement, the U.S. government will continue to pursue energy cost reduction in its real property inventory. It makes good business sense to do so and I would expect the Trump Administration to recognize the same. The notable change is that emerging sustainability policies will be benched before taking the field. Among these are proposed sustainability measures far more reaching than any we’ve seen previously.

Nonetheless, even in the absence of federal leadership, energy efficiency policies, including GHG reporting, are percolating at the state and municipal level. Trump’s hometown (New York) and his current home (DC) are both cities that mandate GHG emissions disclosure. This is also true of at least a dozen other cities, including most where GSA has a major regional presence. Many cities are incorporating “green” principles into their building codes and industry groups, such as the U.S. Green Building Council, are becoming increasingly prominent.

The Paris withdrawal demonstrates a new set of priorities focused on economic development and energy independence, without regard for global warming issues. This will yield less ambitious sustainability goals, though energy efficiency and conservation will remain central themes in federal leasing policy.

Kurt Stout is the national leader of Colliers International’s Government Solutions practice group, which provides government real estate services to private investors and federal agencies. He also writes about federal real estate on his Capitol Markets team blog. You can contact Kurt by email or on Twitter.